Ninth Circuit Strikes Down California's Law Outlawing Mandatory Arbitration Agreements

On February 15, 2023, the United States Court of Appeals for the Ninth Circuit issued its decision in Chamber of Commerce of the United States of America, et al. v. Bonta, et al. In this decision, the Ninth Circuit found California Assembly Bill 51 (AB 51) to be preempted by the Federal Arbitration Act (FAA), and therefore, unenforceable against California employers. This decision reaffirms the right of employers to require a properly-drafted arbitration agreement as a condition of employment, and/or continue to use or update existing arbitration programs.

Background

In 2019, California Governor Gavin Newsom signed AB 51 into law. AB 51 represented the latest in a series of attempts by the California legislature to prevent employers from requiring employees to sign agreements to arbitrate employment claims. 

California’s legislature was well aware that federal policy favored arbitration, and aware of legal precedent holding that attempts to curtail arbitration might be preempted by the FAA. In drafting AB 51, the legislature tried to avoid preemption by focusing the new law on the formation of mandatory arbitration agreements, and not on the enforceability of signed agreements.  Specifically, AB 51 declared it an unlawful employment practice for an employer to require employees to waive their rights to litigate their claims in court – a fundamental requirement of any arbitration agreement. It provided for civil and criminal liability for employers who violated the law. However, AB 51 did not affect the enforceability of existing agreements to arbitrate.

AB 51 was immediately challenged by the business community based on FAA preemption. The United States and California Chambers of Commerce, along with other business organizations, sued California Attorney General Rob Bonta to prevent the enforcement of AB 51. On December 30, 2019, two days before AB 51 was to become effective, a California District Court agreed, and struck the law down. In September 2021, a three-judge panel of the Ninth Circuit, by a 2-1 vote, issued an unexpected ruling, concluding that most provisions of AB 51 did not conflict with the FAA, and could therefore be enforced. 

The business community plaintiffs asked for a rehearing by the entire Ninth Circuit. In June, 2022, while this rehearing request was pending, the United States Supreme Court issued a decision in another case involving arbitration agreements in California, Viking River Cruises, Inc. v. Moriana. In Viking River, the Supreme Court held that employees could be required to arbitrate, on an individual basis, claims for wage and hour related civil penalties under California’s Private Attorneys General Act. The Supreme Court emphasized the strong federal policy supporting the use of arbitration agreements and the expansive nature of FAA preemption, which applies to any state law inhibiting the use of arbitration agreements.

After Viking River, the original Ninth Circuit panel vacated its decision and agreed to rehear the case. On February 15, 2023, the Ninth Circuit panel, again by a 2-1 vote, affirmed the District Court’s decision and found that AB 51 conflicts with the purposes and objectives of the FAA. The panel rejected the State of California’s contention that AB 51 avoided FAA preemption by focusing on contract formation rather than contract enforcement, concluding that the distinction makes no difference – the effect of the law is to disfavor the use of arbitration agreements, contrary to federal law and policy. Therefore, the Court upheld the District Court’s order preventing enforcement of AB 51.

Implications for Employers

This is a major victory for California employers who use or wish to adopt mandatory arbitration programs. Due to the uncertainty around AB 51, some employers with existing programs were reluctant to require new employees to sign agreements or to modify existing agreements with employees. With this ruling, it is clear – at least for the time being – that employers may require employees to agree to arbitration as a condition of employment. As before, any mandatory arbitration agreement must comply with existing requirements in California. These requirements include, among other things, that the employer pay for costs of the arbitration that exceed the filing fee for civil actions; the agreement must be mutual and not impose shorter statutes of limitations or restrictions on available damages; and it must allow for reasonable discovery and for the recovery of costs and attorney’s fees in accordance with applicable law.

It is also clear that employers are free to require current employees to agree to modifications in existing agreements. This may be important for employers who want to ensure that class and representative claims for wage and hour violations are limited to individual claims in arbitration in light of the Viking River decision, or employers who want to make changes to ensure the enforceability of their arbitration agreements.

What May Come Next

The Ninth Circuit’s decision may not be the final word on the issue. It is likely the State of California will request rehearing by the entire Ninth Circuit. It is also likely, whether or not rehearing is granted, that the losing party will ask the United States Supreme Court to review the case. Given past Supreme Court decisions, the prospects are good that the latest Ninth Circuit decision will be upheld.  

In addition, there have been efforts in Congress to limit the scope of FAA preemption or to ban mandatory, pre-dispute arbitration agreements. One such effort resulted in the “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021,” which took effect in March, 2022. This new federal law, while not prohibiting or invalidating arbitration agreements, provides claimants bringing claims of sexual harassment or sexual assault the right to proceed in court even if they previously agreed to arbitrate such claims. Despite these uncertainties and limitations, arbitration agreements remain a viable alternative for Golden State employers.

For more information on how employers may choose to use mandatory arbitration programs or update existing agreements, please contact your Quarles attorney or:

• Fred Plevin: (619) 744-3650 / fred.plevin@quarles.com
• George Howard Jr.: (619) 243-1577 / george.howard@quarles.com